Ohio's Response to Bonus Depreciation

Ohio's Response to Bonus Depreciation

CCH, 12/11/02

PI & CFT 2002-02 - Ohio Bonus Depreciation Adjustments and the Internal Revenue Code's Passive Activity Loss,
Basis Limitation and At-Risk Rules - November 7, 2002

An Ohio taxpayer claiming IRC section 168(k) bonus depreciation for federal income tax purposes for taxable years
ending before June 5, 2002 must either (i) compute Ohio taxable income for that taxable year as if IRC section 168(k) had not been enacted or (ii) except as set forth below, add back five-sixths of the bonus depreciation claimed for that taxable year and then in each of the five subsequent taxable years deduct one-fifth of the amount previously added back. For taxable years ending after June 4, 2002 taxpayers cannot compute Ohio taxable income as if IRC section 168(k) had not been enacted; rather, taxpayers must generally add back five-sixths of the bonus depreciation claimed for the taxable year and then in each of the five subsequent taxable years deduct one-fifth of the amount previously added back. Applicable to assets which the taxpayer acquired during taxable years ending in 2001, 2002, 2003, and 2004, these adjustments also apply to depreciable assets acquired by the taxpayer's disregarded entities and to depreciable assets acquired by pass-through entities in which the taxpayer directly or indirectly has an equity interest of at least five percent.

If the taxpayer is a five percent or more equity investor in a pass-through entity which has claimed the IRC section 168(k) bonus depreciation and if, because of the Internal Revenue Code's passive activity loss limitation rules, basis limitation rules, or at-risk limitation rules, the taxpayer is unable to fully deduct a loss passing through from the pass-through entity to the taxpayer, then to the extent that the taxpayer does not currently recognize the loss the taxpayer can defer making the "5/6 add-back" until the taxable year or years for which the taxpayer deducts the pass-through entity loss and receives a federal tax benefit from the bonus depreciation amount claimed by the pass-through entity. Of course, the taxpayer cannot begin claiming the related five-subsequent-years deduction until the first taxable year immediately following the taxable year for which the taxpayer makes the 5/6 add-back.

If you have questions, please e-mail us.

Guidance has been issued for Ohio corporation franchise (income) taxpayers and personal income taxpayers claiming bonus depreciation under IRC Sec. 168(k).

An Ohio taxpayer claiming bonus depreciation for federal income tax purposes for tax years ending before June 5, 2002 must either (1) compute Ohio taxable income for that tax year as if IRC Sec. 168(k) had not been enacted or (2) except as described below, add back 5/6 of the bonus depreciation claimed for that tax year and then in each of the five subsequent tax years deduct 1/5 of the amount previously added back. For tax years ending after June 4, 2002, taxpayers cannot compute Ohio taxable income as if IRC Sec. 168(k) had not been enacted. Taxpayers must generally add back 5/6 of the bonus depreciation claimed for the tax year and then in each of the five subsequent tax years deduct 1/5 of the amount previously added back.

Applicable to assets that the taxpayer acquired during tax years ending in 2001 through 2004, these adjustments also apply to depreciable assets acquired by the taxpayer's disregarded entities and to depreciable assets acquired by pass-through entities in which the taxpayer directly or indirectly has an equity interest of at least 5%.

If the taxpayer is a 5% or more equity investor in a pass-through entity that has claimed the bonus depreciation and if, because of the federal code's passive activity loss limitation rules, basis limitation rules, or at-risk limitation rules, the taxpayer is unable to fully deduct a loss passing through from the pass-through entity to the taxpayer, then the taxpayer can postpone making the add-back. To the extent that the taxpayer does not currently recognize the loss, the taxpayer can defer making the 5/6 add-back until the tax year or years for which the taxpayer deducts the pass-through entity loss and receives a federal tax benefit from the bonus depreciation amount claimed by the pass-through entity. The taxpayer cannot begin claiming the related five subsequent years deduction until the first taxable year immediately following the taxable year for which the taxpayer makes the 5/6 add-back.

Personal Income and Corporation Franchise (Income) Tax InformationRelease PI & CFT 2002-02, Ohio Department of Taxation, November 7, 2002, * * * * * Applicable law: Ohio Revised Code1 sections 5733.04(I)(17), 5733.04(I)(18), 5733.40(A)(5), 5747.01(A)(20), 5747.01(A)(21), and 5747.01(S)(14).

1 For detailed information regarding this adjustment, see the Department's July 31, 2002 information release entitled, "Recently-enacted Ohio Legislation Affects Depreciation Deductions for Taxable Years Ending in 2001 and Thereafter" available at http://www.state.oh.us/tax/Information-Releases/picft200201.html.

BNA, 8/22/02:

Ohio Tax Department Explains State Reporting Of Federal Bonus Depreciation Deduction
The Ohio Department of Taxation explained in a July 31 information release how taxpayers should report the new federal bonus depreciation for state purposes.

The federal Job Creation and Worker Assistance Act of 2002 (Pub. L. No. 107-147) established a 30 percent depreciation bonus for qualified capital investments, effective for 36 months for property placed in service after Sept. 10, 2001. In June, Ohio enacted S.B. 261, spreading the deduction over six years for state franchise tax purposes (118 DTR H-3, 6/19/02).

For tax years ending after June 4, 2002, taxpayers taking the federal accelerated deduction must add back five-sixths of the depreciation in determining Ohio income. However, the taxpayer may take the bonus depreciation over the next five years, one-fifth of the addback amount each year, recovering the entire federal depreciation.

Taxpayers with tax years ending before June 5, 2002, may elect to take the deduction using the five-sixths to one-fifth addback rules. However, if they do not elect to do so, they must recompute Ohio taxable income based on the depreciation expense available without regard to the new bonus deduction.

Text of the department's release is available at http://www.state.oh.us/tax/Information_Releases/picft200201.html.

CCH, 6/7/02:

On June 5, 2002, Ohio Governor Bob Taft signed the state budget bill. As enacted, the budget bill decouples Ohio corporation franchise (income) tax and personal income tax from the federal Job Creation and Worker Assistance Act (P.L. 107-147) (JCWAA) provisions allowing a 30% "bonus" depreciation deduction from the cost of qualified property acquired after September 10, 2001, and before September 11, 2004. The bill requires that Ohio taxpayers add-back 5/6 of the amount of "bonus" depreciation deduction taken for federal purposes. Taxpayers are then allowed to claim the 5/6 in equal amounts over the next five tax years. Provisions are also included for allocating and apportioning the add-back and five-year deduction, treatment of the add-back and deduction for pass-through entities, and an election for corporations to apply the provisions to the 2003 tax report.

In addition, S.B. 261 (1) indexes the personal income tax rate schedule for inflation beginning in 2005; (2) requires that income from liquidating all or part of a business, including income from goodwill, be subject to apportionment rather than allocation; (3) modifies the apportionment rules for nonresident owners of pass-through entities; (4) attributes direct ownership in certain disregarded entities or qualified subchapter S subsidiaries (QSubs) to the parent corporation and attribute a subsidiary's tax items to the parent corporation; (5) applies the Ohio personal income tax to trust income for taxable years beginning in 2002, 2003, and 2004 (currently, the personal income applies to individuals and estates); and (6) removes corporation franchise (income) tax language that was found unconstitutional by the Ohio Supreme Court in Emerson Electric v. Tracy, 90 Ohio St.3d 157 (2000), regarding deduction of dividends from a foreign affiliate. (S.B. 261, Laws 2002, effective June 5, 2002, unless otherwise noted above; Bill Analysis, S.B. 261, Ohio Legislative Service Commission.)